ACCT
2202 MASTER BUDGETING PROJECT - Earrings Unlimited
You
have just been hired as a new management trainee by Earrings Unlimited, a
distributor of earrings to various retail outlets located in shopping malls
across the country. In the past, the company has done very little in the way of
budgeting and at certain times of the year has experienced a shortage of cash.
Since
you are well trained in budgeting, you have decided to prepare comprehensive
budgets for the upcoming second quarter in order to show management the
benefits that can be gained from an integrated budgeting program. To this end,
you have worked with accounting and other areas to gather the information
assembled below.
The
company sells many styles of earrings, but all are sold for the same price—$10
per pair. Actual sales of earrings for the last three months and budgeted sales
for the next six months follow (in pairs of earrings):
Actual and Budgeted Sales in Units
Actual
|
Budgeted
|
|||||||
January
|
February
|
March
|
April
|
May
|
June
|
July
|
August
|
September
|
20,000
|
26,000
|
40,000
|
65,000
|
100,000
|
50,000
|
30,000
|
28,000
|
25,000
|
The
concentration of sales before and during May is due to Mother’s Day. Sufficient
inventory should be on hand at the end of each month to supply 40% of the
earrings sold in the following month. Suppliers are paid $4 for a pair of
earrings. One-half of a month’s purchases is paid for in the month of purchase;
the other half is paid for in the following month. All sales are on credit,
with no discount, and payable within 15 days. The company has found, however,
that only 20% of a month’s sales are collected in the month of sale. An
additional 70% is collected in the following month, and the remaining 10% is
collected in the second month following sale. Bad debts have been negligible.
Monthly operating expenses for the company are given below:
Monthly Operating Expenses
Variable
4% Sales
Commission as % of Sales
Fixed
$200,000 Advertising
$18,000 Rent
$106,000 Salaries
$7,000 Utilities
$3,000 Insurance
$14,000 Depreciation
Insurance
is paid on an annual basis, in November of each year. The company plans to
purchase $16,000 in new equipment during May and $40,000 in new equipment
during June; both purchases will be for cash. The company declares dividends of
$15,000 each quarter, payable in the first month of the following quarter. A
listing of the company’s ledger accounts as of March 31 is given below:
Account Balances as of March 31
Assets
$74,000 Cash
$346,000 Accounts Receivable
$104,000 Inventory
$21,000 Prepaid Insurance
$950,000 Property and Equipment
$1,495,000 Total Assets
Liabilities and Stockholders' Equity
$100,000 Accounts Payable
$15,000 Dividends Payable
$800,000 Common Stock
$580,000 Retained Earnings
$1,495,000 Total Liabilities and Stockholders' Equity
The
company maintains a minimum cash balance of $50,000. All borrowing is done at
the beginning of a month; any repayments are made at the end of a month. The
company has an agreement with a bank that allows the company to borrow in
increments of $1,000 at the beginning of each month. The interest rate on these
loans is 1% per month and for simplicity we will assume that interest is not
compounded. At the end of the quarter, the company would pay the bank all of
the accumulated interest on the loan and as much of the loan as possible (in
increments of $1,000), while still retaining at least $50,000 in cash.
Required:
Using
the Excel Spreadsheet supplied, prepare a master budget for the three-month
period ending June 30. Include the following detailed budgets:
1. a. A sales budget, by month and in total.
b.
A schedule of expected cash collections from sales, by month and in total.
c.
A merchandise purchases budget in units and in dollars. Show the budget by
month and in total.
d.
A schedule of expected cash disbursements for merchandise purchases, by month
and in total.
2.
A cash budget. Show the budget by month and in total. Determine any borrowing
that would be needed to maintain the minimum cash balance of $50,000.
3.
A budgeted income statement for the three-month period ending June 30. Use the
contribution approach.
4.
A budgeted balance sheet as of June 30.
TUTORIAL PREVIEW
Sales Budget
April
|
May
|
June
|
Quarter
|
|
Budgeted unit sales
|
65,000
|
100,000
|
50,000
|
215,000
|
Selling price per unit
|
$10
|
$10
|
$10
|
$10
|
Total sales
|
$650,000
|
$1,000,000
|
$500,000
|
$2,150,000
|
